Buyouts and the Credit Crunch

Buyouts Under Pressure in Credit Crunch

As the economy falters, several major private equity-backed companies have filed for bankruptcy revealing a grim insight into the recession’s impact on private equity. A new article shows how private equity buyout firms are feeling the squeeze of the credit crunch.

While earlier this week a report showed that salaries and bonuses were staying strong for private equity firms despite the financial crisis, it appears that many companies acquired by private equity firms are now struggling under the amount of debt used for the buyouts. The New York Times has a critical article that points toward private equity as a contributor to the United States’ struggling economy:

Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble uphuge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us.

Linens ’n Things, a big retailer owned by the private equity firm Apollo Management, filed for bankruptcy protection this year.

The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.

The piece presents a bleak outlook for those who are working for an acquired firm and those who invested in private equity too, as returns are expected to decrease in the near future:

People who work for companies owned by private equity firms could lose their jobs as firms cut costs to meet their debt obligations. And private equity firms like Apollo Management, which owns Harrah’s and Linens ’n Things, face deep markdowns on the value of their holdings.

Pension funds and college endowments that invested their money into in these funds in recent years hoping for big returns are likely to suffer as well, and many of those investors could face a cash squeeze, as they are forced to hold onto their investments for years until the economy recovers.

To read the full article click here.

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